What Are CEOs Worth?
October 4, 2002
The belief that only the right CEO can lead a company drives up salaries due to the perceived scarcity of top talent. But the skyrocketing salaries of corporate tycoons have sparked a heated debate over how much they are worth.
- In 1960, the average head of a top company earned twice as much as the U.S. President compared with more than 60 times as much today.
- In 1980, on average, the CEOs of the biggest U.S. companies were paid 40 times as much as hourly wage earners at their companies compared with almost 500 times as much today.
However, according to Rakesh Khurana of Harvard Business School, the pool of CEO candidates has long been kept artificially small. Ninety positions open up each year and the only people considered for most of them are heads of other big companies. To recruit them, many CEOs must be lured away with large compensation packages. Company boards often recruit from outside their firm and even outside their industry. Indeed, Robert H. Frank and Philip Cook of Cornell University calculated that by 1990 there were 50 percent more outside hires by leading Fortune 500 companies than in 1970.
But as more companies led by former corporate icons collapse, several new studies are challenging the assumptions on which executive searches are based.
- One study found recruiting a "savior" from outside the firm can cause resentment among other managers and distract a company from its underlying problems.
- Another study found that more than 90 percent of successful companies were led by executives promoted from within.
Yet, of those companies identified as attempting to make the leap "from good to great," two-thirds had hired outsider chief executives.
Source: Staff Writer, "Are CEOs Worth Their Salaries?" Washington Post, October 2, 2002.
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